The acquisition of a 49% minority interest in the Denton-Rawhide gold mine and the merger with
The past two years of low gold prices have been especially challenging for Vancouver-based Dayton as it addressed operational problems at its wholly owned Andacollo gold mine in central Chile and took measures to restructure its balance sheet.
The final loan payment of US$1.7 million was made in January, resulting in the elimination of debt related to Andacollo. In 1999, the company reached an agreement with its debenture-holders to exchange US$69 million of unsecured convertible debentures into 310 million shares of Dayton. President William Myckatyn said the debenture was strangling the company and that its reorganization was necessary for its survival.
Andacollo is an open-pit, heap-leach operation. Development and construction began in July 1994 and were completed in September 1995. Construction was partly funded out of proceeds from a $34-million equity offering in May 1994 and US$50 million in project financing, which was completely drawn down by September 1995.
The mine began commercial production Jan. 1, 1996, at 12,700 tonnes per day and, in its first year, produced 87,650 oz. at a cash cost of US$205 per oz. In 1997, Andacollo produced a lower-than-expected 91,347 oz. at a higher cash operating cost of US$251 per oz. The disappointing results were attributed to the mining of lower-grade ore, along with higher stripping ratios. Production was also affected by exceptionally bad weather and shutdowns for improvements to the crushing and processing circuit, which increased the mine’s throughput capacity to 18,100 tonnes per day.
Andacollo continued to struggle operationally in the first half of 1998, mainly for reasons related to mining of the higher-grade Socorro deposit. Old stopes and underground workings posed problems regarding scrap metal and the generation of oversized material, all of which caused delays in mining and reduced crusher throughput. Lower-grade ore from the Tres Perlas West deposit had to be substituted. Furthermore, grade inconsistencies were detected in the Socorro material.
By June 1998, a new board of directors was elected and Myckatyn was appointed chairman and CEO. A comprehensive review of sample preparation and grade-control practices determined that the inconsistencies were largely due to the relatively coarse gold that occurs at Socorro.
With the addition of new sample preparation equipment and protocols, plus the implementation of screen fire assaying of the blast holes, grade control improved significantly. During the third quarter, consultants were brought in to review different aspects of the mine operation, including heap-leach performance and recovery, the crushing system, pit design and mine planning activities. As a result of these efforts, Andacollo produced 30,558 oz. in the fourth quarter of 1998 at a cash cost of US$209 per oz., and produced 92,548 oz. at US$241 per oz. for the year.
In 1999, the mine produced a record 134,995 oz. at a cash cost of US$204 per oz. Production during the final quarter was 29,507 oz. at US$244 per oz., the increase in cost being the result of higher waste-stripping demands and slightly lower grades.
Dayton anticipates Andacollo will produce 125,000 oz. in 2000 at a cash cost of US$229 per oz. The Churrumata, Natalia and Tres Perlas pits are being mined concurrently. Based on a gold price of US$325 per oz., reserves at the end of 1999 were estimated to be 17.8 million tonnes grading 0.88 gram gold per tonne, equal to 502,000 contained ounces. Recovery is averaging about 67%. The stripping ratio is 1.79-to-1.
Capital expenditures going forward the next number of years will total US$3.7 million, including US$1.3 million on leach-pad expansion in 2000. This year, the company plans to spend a further US$1 million in exploration drilling on the mine property.
Denton-Rawhide
Dayton acquired the 49% interest in the Denton-Rawhide mine from
Reserves at year-end stood at 31.9 million tonnes grading 0.71 gram gold and 11.68 grams silver per tonne, equivalent to 723,000 contained ounces gold and 12 million contained ounces silver. The estimates are based on a gold price of US$325 per oz. The average ultimate recovery is calculated to be 64% for gold and 39% for silver.
Myckatyn said the acquisition of Denton-Rawhide will provide Dayton with a larger base from which to acquire other gold-producing assets.
“It’s quite a big land package [69.7 sq. km] and we think that there is significant exploration upside,” he told shareholders at a recent meeting. “We bought the asset for the production and the reserves that are there, but we think that if we can get a bit more aggressive on the exploration side, there is potential.”
Dayton’s share of production from Denton-Rawhide is expected to average 60,000 oz. gold-equivalent per year over the next three years, with cash costs averaging US$213 per oz. gold-equivalent. Capital expenditures going forward are forecast at US$2.4 million, of which US$1.5 million to US$2 million will be spent primarily next year on leach pad expansion to accommodate the remaining reserves.
Mirage
Meanwhile, Dayton has acquired the El Dorado gold-silver project in El Salvador through its merger with Mirage Resource. “We think Mirage is one of the best kept secrets,” said Myckatyn. The El Dorado project is 65 km northeast of the capital city of San Salvador and covers a high-grade banded quartz vein system. The district was initially exploited by the Spaniards during colonial times. In 1942, a subsidiary of Rosario Resources acquired the property and developed four levels of underground workings serviced by two shafts. Between 1948 and 1953, the mine produced 72,487 oz. gold and 355,123 oz. silver from 270,000 tonnes of processed ore.
Mirage optioned the property in 1993 from Zinc Metal of Toronto and entered into a joint-venture arrangement with Dejour Mines and Bethlehem Resources, subject to a back-in right held by Kinross. Mirage bought out Dejour’s and Bethlehem’s interests in May 1995. Following the completion of a prefeasibility study by James Askew & Associates in the fall of 1995, Kinross waived its back-in right as a result of restrictive time constraints relating to the completion of a bankable feasibility study.
The gold-bearing veins of the El Dorado district occur over an area of about 50 sq. km. The steeply dipping veins are up to 2 km long and range in width from 1 and 15 metres, based on surface exposures. The average width of the veins mined by Rosario was in the range of 1.4 metres.
The prefeasibility study considered a 1,500-tonne-per-day mill to treat ore from proposed underground mines at El Dorado and La Coyotera, as well as a small open pit at Nueva Esperanza. Based on a resource of 3.7 million tonnes grading 6.04 grams gold and 44.19 grams silver and a gold price of US$385 per oz., the study projected an average annual production of 94,200 oz. gold-equivalent over a 7-year mine life at a cash cost of US$184 per oz. gold-equivalent. Capital costs were estimated at US$54 million. Preliminary recoveries employing cyanidation ranged from 91% to 98% for gold and from 66% to 89% for silver.
High-grade portion
In 1997, Kinross incorporated the results from 42,000 metres of drilling to estimate a geological resource of 4.2 million tonnes grading 6.64 grams gold and 48.4 grams silver, equivalent to 892,
000 contained ounces gold and 6.5 million contained ounces silver. A higher-grade portion in the El Dorado veins was calculated at 1.3 million tonnes grading 11 grams gold and 74.6 grams silver, or 457,000 oz. gold and 3.1 million oz. silver.
Dayton intends to focus on high-grade material below the previously mined area and is contemplating a 500-tonne-per-day operation producing somewhere in the range of 60,000-70,000 oz. gold a year at costs of under US$200 per oz.
Dayton is under the gun to complete a feasibility study by July 2001, which is when the exploration licence expires. To convert the exploration permit to a exploitation licence, an application must be accompanied by a feasibility study, a work program, an environmental impact study and program of exploitation.
The company will investigate the possibility of dewatering the existing underground working so that infill drilling from underground can begin. The cost of completing a bankable feasibility study is estimated at US$5 million.
Under terms of the recent merger, Mirage shareholders received 0.667 of a Dayton share for each share held. This exchange ratio represents a purchase price of 7.5 per Mirage share, representing a 14% premium based on a 30-day averaging trading price when the deal was struck, on Feb. 13. The principal asset of Mirage is its wholly owned El Dorado gold project in El Salvador.
Kinross owned approximately 14.3 million shares of Mirage for a 53.8% interest and agreed to transfer to Dayton its $2.7 million in loan arrangements with Mirage in exchange for additional shares of Dayton at an effective price not less than 11.3. Dayton issued approximately 42 million shares to acquire Mirage and its debit, at an effective value of $4.7 million.
Equity financing
The Mirage and Denton-Rawhide acquisitions saw Dayton issue a total of 187 million shares. Prior to the acquisitions, the company closed a $9-million equity financing of 81.8 million special warrants priced at 11 per warrant. The underwriters were Newcrest Capital and Dundee Securities. Each special warrant is exercisable at no further cost into one share. Kinross participated in the financing to the tune of $2 million.
Upon closing of the transactions, Dayton had about 640 million shares outstanding. The company has consolidated its shares on the basis of one “new Dayton” share for each 20 Dayton shares held. The “new Dayton” now has 32.8 million shares outstanding. Kinross now owns about 32% of Dayton and will have two of its representatives sit on Dayton’s board of directors.
“We have made an investment in a management team that has demonstrated an ability to develop and operate gold projects successfully,” said Robert Buchan, chairman and CEO of Kinross. “We are pleased to be associated with Dayton and intend to be a long-term sponsor to Dayton, providing capital support for the acquisition of new projects and the development of new properties as required.”
Said Myckatyn: “We went through a lot of pain to get Dayton into a position where it could grow, and I am pleased to have these transactions completed. Going forward, I welcome the input and the participation of Kinross.”
With the adoption of “fresh start” accounting on March 31, 1999, Dayton realized a net loss of US$2.1 million (or 1 per share) on gold revenue of US$26.3 million for the 9-month period ended Dec. 31, 1999, compared with a loss of US$40.2 million (98 per share), including US$33.3 million in writedowns, on revenue of US$23.3 million during the comparable period in 1998. In the first quarter of 1999, the company recorded a profit of US$410,000 (or a loss of 2 after recognizing the effect of equity accretion on the convertible debentures) on US$10.2 million in revenue, compared with a loss of US$2.2 million (8 per share) on revenue of US$6.7 million in the year-ago period.
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